Risk management, to me it seems, has grown by leaps and bounds since the financial crisis – finding applicability everywhere and dare I say rightly so.

During the global financial crisis, many companies operated with the fear that suppliers would be forced into default, cutting off critical sources of components and increasing the cost of introducing alternative suppliers.

Yet, the following observation flies in the face of the purported effort to manage risks within the supply chain.

Dealing with cost pressures of their own, many customers have increased their efforts in asset management and have started shifting supply chain risks upstream to their suppliers.

Is this managing risk or passing the buck? Isn’t the end result of this that the supply chain risks are passed back to the production point? The purpose of inventory within the supply chain is to buffer variability that occurs. In the case of offshored/outsource supply chains, significantly greater amounts of inventory is required to buffer variability because of the longer lead times. Shifting supply chain risks upstream just means that the lead times that are currently experienced (which are long) are about to get longer. You’re about to enter the twilight zone – of worsening lead times that is. Why?

Variability in lead times, require greater amounts of inventory to cover it but the greater requirement for inventory is what causes the worsening lead time in the first place. If this is true, then the consequent observation (a few quarters down the road) will be that offshored/outsourced production centers are buzzing to the brim but there is all sort of snafus in the supply chain downstream from the production point. And that is the consequence of passing the risk instead of managing it.

C’mon folks – If you’ve committed to the long lead time supply chain, inventory is a fact of life. Maybe, the fact of life. If the volatility of demand from the consumer (straining under the economic headline of the day, week or month) is getting to you, the response cannot be to cut inventory because that is the only thing that is keeping the risk of supply chain disruption at bay. Interesting times indeed!!!

At this point, the decisions based on unit costs don’t look very good – this is what is meant by the phrase “There’s no free lunch.”

Volatility and risk can become intolerable at which point, there will be sufficient reason to realign the global supply chains towards more regional supply chains.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.